The Government seeks to attain a 4.6% GFD/GDD for FY2014RE and indicates a process of fiscal consolidation by targeting a GFD/GDP of 4.1% in FY2015BE. However, the quality of deficit remains an issue with a massive squeeze in the plan expenditure to achieve the numbers for FY2014RE. Going forward, we think that the Government has overestimated its revenue numbers for FY2015BE and the GFD/GDP number could be higher for FY2015E at 4.5%. Higher gross borrowing numbers under FY2015BE and little expectations of policy rate easing by the RBI imply that benchmark G-Sec yields will remain sticky on the higher side.

4.1% GFD/GDP for FY2015BE

The vote-on-account budget paints a rosy picture of the fiscal scenario for FY2015E with the GFD/GDP at 4.1% against a GFD/GDP of 4.6% for FY2014, better than the FY2014BE of 4.8%. However, we contend that this is an interim budget and the real picture could emerge in the budget to be presented by the new Government, sometime in June 2014, which is also likely to include a full plan from the Government to stabilize the economy as also kick-start growth. The current numbers for FY2015BE are predicated on a nominal GDP growth of 13.4%, with a real GDP growth of ~6%. This in itself indicates that the gross tax revenue collections targeted in the FY2015BE at 19% could be at risk. Given our lower nominal GDP estimate at ~11.1%, we think that the Government will be able to garner a 15% growth in the gross tax revenues, immediately implying a slippage of ~Rs480 bn on the revenue side. With the total expenditures broadly on target, this is likely to lead to a GFD/GDP for FY2015E at 4.5%.

Structural changes for fiscal consolidation continue to be missed

While the FM attempts at a numerical correction of the GFD/GDP, the absolute GFD for FY2015BE remains almost unchanged when compared to FY2014RE. The interim budget tries to provide some small sops for the capital goods sector and the auto sector in the form of an excise tax rate reduction. Overall, the structural adjustments to the fiscal remain unattended as the GST and the DTC fail to be introduced in FY2015BE and the reliance on enhanced tax collections is mostly through improved compliance. Further, on the expenditure side, the wasteful expenditures in the form of interest payments and subsidies remain at a cumulative 5.3% of GDP as per